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. Last Updated: 07/27/2016

Slavneft Sale a Safe Bet Against Oil Instability

Russia's decision to sell 75 percent of state-controlled oil firm Slavneft will protect it against a drop in budget revenues if a U.S.-led attack on Iraq hits oil prices, market players said Friday.

The sale of the company, Russia's ninth-largest and one of the last tidbits in the government's portfolio, is expected to spark intense bidding competition among the country's bigger energy firms anxious to boost refining capacity, they added.

"Today, they don't need the money, but this is a prudent action -- selling into a high asset price to protect against falling asset prices and budget revenues," said Chris Weafer, chief strategist at Alfa Bank.

Prime Minister Mikhail Kasyanov signed a decree late last week ordering the privatization of 75 percent of Slavneft. The government published the order on its web site early Friday. According to the document, the proceeds should be received by Feb. 15, 2003, the same day that Russia is due to make a $1.5 billion debt payment to the International Monetary Fund, the Kommersant newspaper reported Saturday.

Russia's foreign debt payments hit their peak next year, which is why the government has decided to put almost the entire oil company on the block instead of a 20 percent stake as was originally planned [see related story on this page].

"It makes sense to sell this asset when oil prices are at their peak. It's insurance against a decline in oil prices next year and potentially lower budget revenues," said Leonid Mirzoyan, oil analyst at Deutsche Bank.

The looming threat of a U.S. invasion of Iraq has kept Brent crude prices is London around $30, but analysts say the overthrow of Saddam Hussein would free the country's oil supplies and push prices down.

Yukos CEO Mikhail Khodorkovsky predicted Friday that crude oil prices would stay at $12 to $16 per barrel for two years if the United States succeeds is ousting Saddam. This period would begin 18 months after the start of military action and prices would hover at high levels during those 18 months, he said.

Property Ministry spokesman Alexander Parshukov said $1.3 billion was the minimum price at which the government would sell the Slavneft stake, but analysts said it could get more.

"The government should do well out of this; they should go for a higher price," Weafer said.

Parshukov said foreign companies would be allowed to participate in the auction, set to take place by the end of November, although the Property Ministry has not gauged their interest.

The sale will be conducted as a public auction, similar to those seen at art houses, meaning that every participant will be able to see what the others are bidding, Interfax quoted a Cabinet source as saying.

"This kind of sale, where we will have an auctioneer with a hammer in hand, has never before been used to privatize a large corporation in this country," the source said.

Market commentators, however, said this would not be an important issue.

"I think it is going to be a domestic affair," said Steven Dashevsky, oil and gas analyst at Aton brokerage.

The front-runners in the race to buy Slavneft are seen as No. 3 producer Surgutneftegaz and No. 5 Sibneft, one of Russia's fastest-growing oil companies.

Other oil majors, including LUKoil, Yukos and Tyumen Oil Co., or TNK, said Friday they were mulling possible participation in the auction. Company officials said they were waiting for the Federal Property Fund to reveal the terms of the auction.

The ultimate winner may prove to be an alliance instead of an individual company, analysts said.

Sibneft is following a policy of aggressively increasing production; it plans to more than double output to 830,000 barrels per day by 2005. With its export volumes limited by government decree, Sibneft needs Slavneft's refineries to accommodate its growing production.

Surgutneftegaz has been criticized for having no clear development strategy and is the worst performer among Russia's blue-chip oil stocks.

"Surgut has been just piling on the cash and doing nothing with it, while Sibneft needs access to refineries," Weafer said.

Sibneft already has a small stake in Slavneft as a consortium of private firms, including the country's fourth-largest producer, TNK, owns 13 percent of the firm. The Belarussian government controls the remaining 11 percent.

This could be a stumbling block for Slavneft's suitors. According to the law on joint stock companies, any company that gains a majority stake is obligated to buy out minority shareholders at market prices. In the case of Slavneft, which is not publicly traded, the market price per share will probably be set by the selling price at the auction.

(Reuters, MT)